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IRS Issues New Procedures for Large Corporate Audit Disclosures

For decades, large corporate taxpayers under continuous audit have been able to make disclosures under Revenue Procedure 94-69 at the beginning of an examination to notify the Internal Revenue Service (IRS) of adjustments (both positive and negative) to their tax returns and thereby obtain protection from various penalties and obviate the need to file a formal amended tax return. In 2020, the IRS questioned the continuing utility of this disclosure process and invited comments on said process. With the new Revenue Procedure 2022-39, the IRS has moved the largest corporate taxpayers into a new era of voluntary disclosure. This is a significant development for impacted taxpayers.

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IRS Proposes New Process for Post-Filing Disclosures to Replace Revenue Procedure 94-69

For many years, the Internal Revenue Service (IRS) has provided large corporate taxpayers who are under continuous audit to make affirmative disclosures at the start of an audit so they have an opportunity to disclose tax positions and avoid certain civil tax penalties. The procedure, outlined in Revenue Procedure 94-69, has been very popular with both taxpayers and IRS agents because it provides a mechanism that allows taxpayers to informally “amend” a return without filling out all of the paperwork. IRS agents also like the procedure because it allows them to focus the examination on the disclosed issues and incorporate the adjustments in the final computation from the audit. Indeed, the procedure has grown in practice to include the disclosure of affirmative and negative adjustments at the start of the examination and not just in the audits of taxpayers under the jurisdiction of the IRS’s Large Business & International division. However, as the continuous audit paradigm has ended, in 2020 the IRS questioned the continuing viability of this procedure and sought comments from taxpayers on if, and how, it should continue.

Numerous commentators (including the American Bar Association Section of Taxation and Tax Executives Institute, Inc.) recommended that the IRS keep this post-filing disclosure procedure in place, citing the following points in support:

  • The procedure avoids the need to file a formal amended return, a burdensome process on large taxpayers.
  • Requiring formal amended returns can be a significant strain on taxpayer resources, including the potential need to deal with state and local tax filings.
  • All mistakes can be fixed at one time (i.e., avoiding multiple amended returns).
  • The procedure eases reporting issues with Schedules K-1 that are issued after the original tax return is filed.
  • The procedure allows incorporating carryover adjustments from prior examinations.
  • There’s potential to avoid strict liability for penalties relating to transfer pricing adjustments.

On February 25, 2022, the IRS announced that it will standardize the process for making post-filing disclosures so that eligible taxpayers and IRS agents have consistent guidelines for determining what constitutes an adequate disclosure. To that end, the IRS has published a new draft form, Form 15307, Post-Filing Disclosure for Specified Large Business Taxpayers, to be used by eligible taxpayers seeking to make a post-filing disclosure. Taxpayer comments on the new draft form can be submitted here.

The draft Form 15307, which must be signed under penalties or perjury, requires that the taxpayer identify the number of disclosures and provide specific information about each disclosure, including:

  • Adjustment type
  • Timing
  • Effect of carryover
  • Description
  • Increase/decrease to taxable income or tax credits
  • Explanation of the item being disclosed

Examples of acceptable and unacceptable descriptions and disclosures are provided in the instructions to the draft form. Generally, netting of adjustments is not permitted, however, where the facts and circumstances of an item are identical and represent a high volume of low dollar amounts, the disclosures can be netted. The [...]

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Extending the Statute of Limitations for Assessing Federal Tax

We previously provided an overview of the time limits imposed on the Internal Revenue Service (IRS) for assessing federal tax. The general rule is that the IRS must assess tax within three years from the later of the due date of the original tax return or the date it was filed. If the IRS does not assess tax during this period, it is foreclosed from doing so in the future. Note that the filing of an amended return does not restart or extend the limitations period. There are numerous exceptions to this rule, including if there is a substantial omission of income, fraud, failure to file a return, extension by agreement and failure to provide certain information regarding foreign transactions. We discussed many of these exceptions in Seeking Closure on Tax Positions: A Look at Tax Statutes of Limitation and Omitted Subpart F and GILTI Income May Be a Statute of Limitations Trap for the Unwary. Below, we discuss the rules and considerations for consenting to extending the time to assess federal tax.

Internal Revenue Code (Code) Section 6501(c)(4) provides that, except in the case of estate taxes, taxpayers (or their duly authorized representative) and the IRS may consent in writing to an extension of the limitations period for assessment. Importantly, such an agreement must be executed before the limitations period expires. In other words, assuming no other exception applies to the general three-year rule, an agreement to extend the limitations must be executed within the later of three years from the date the tax return was due or filed. If executed after that date, the consent is invalid. Thus, a late-filed consent cannot revive an otherwise closed limitations period. Under Code Section 6511(c), extending the statute of limitations on assessment also extends the period for filing a claim for credit or refund to six months after the expiration of the extended assessment period.

Form 872, Consent to Extend the Time to Assess Tax, is generally used to effectuate an agreed extension to a certain date, however, other versions of the form may be used for different types of taxpayers or issues (e.g., Form 872-M, Consent to Extend the Time to Make Partnership Adjustments, is used for partners subject to the centralized partnership audit regime under the Bipartisan Budget Act of 2015). Form 872-A, Special Consent to Extend the Time to Assess Tax, may be used to extend the limitations period for an indefinite period (referred to as an Open-Ended Consent). An Open-Ended Consent ends 90 days after the mailing by the IRS of written notification of termination or receipt by the IRS of written notification of termination from the taxpayer (both actions are accomplished through the use of Form 872-T, Notice of Termination of Special Consent to Extend the Time to Assess Tax), or the mailing of a notice of deficiency. The IRS’s views on Open-Ended Consents are summarized in
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